There will be no gradual withdrawal of the incentive. The Hawaiian Electric programs were capped at existing levels as of the release of the Oct. 12 decision, and lower remuneration rates were put into place for new rooftop solar systems on each of the state's islands. Systems with existing retail rate net metering deals will be able to keep them for the life of their contracts.

Renewables policy issues in Hawaii are commonly referred to as postcards from the future because the high penetration of solar on the isolated island’s grid has forced the power sector into changes that many observers expect to hit the mainland in the coming years. If and when that happens, the decisions Hawaii utilities and their regulators make will help instruct utility regulators across the country.

“This Order initiates the first step in an evolution of distributed energy resource (“DER”) policies," the commission wrote in its decision ending Phase 1 of its DER proceeding, “which will significantly advance the integration of DER throughout the State.”

Along with new DG remuneration rates, the commission also approved revised and streamlined interconnection standards and provided guidance toward policies it wants stakeholders to work on in the next phase of the proceeding.

“During Phase 2,” it added, “the commission will consider further modifications of DER policies to ensure Hawaii continues to benefit from the safe and reliable integration of these resources.”

For the solar sector, the decision was foundation-shaking.

“The decision was like an earthquake in Hawaii solar,” said Hawaii Island Electric Cooperative Director and ProVision Solar President Marco Mangelsdorf. “Over time, consumers will come around to believe that though the value proposition is diminished, it still makes sense. The questions are how long that will take and how deep the drop-off will be.”

Already, the Alliance for Solar Choice (TASC), a solar advocacy group, has filed suit against the PUC, requesting an injunction on the rooftop solar ruling. TASC spokesperson Bryan Miller said in a statement that the decision "goes far beyond anything proposed by even notoriously anti-solar Hawaiian Electric."

“The PUC’s decision is neither fair nor justified,” Miller told Pacific Business News. “Contrary to a law passed by the Hawaii Legislature two years ago, the PUC failed to conduct a cost-benefit analysis to determine the value of solar on the grid. Instead, the PUC relied upon speculation by the utility and ended net metering without notice to consumers.”

The need for change

In its order, the PUC wrote the state's high net metering credit has led to unprecedented DER penetration in a short period of time.

Net metered systems have increased by over 60 times the cap established by the initial 1996 legislation that set up the metering program. Program capacity now runs from 30% to 53% of system peak load, depending on the utility. Nearly 20% of all customers of the Oahu (HECO) and Maui (MECO) utilities have net metered DG.

“No other utility in the country rivals Hawaii's electric utilities,” the commission wrote. They have managed a great task in “the planning, operational, technical, and regulatory challenges…[of] integrating distributed renewable energy.”

New solar tariffs and TOU rates

To replace NEM, the decision orders two new credits (“tariffs”): A “grid-supply” option and a self-supply option.

The grid-supply option replaces NEM’s retail rate credit for electricity sent to the grid by customers' solar systems. There is a new tariff for each utility, based on the avoided costs of fossil generation during peak generation hours measured from July 2014 to June 2015. It comes to $0.151/kWh for Oahu, $0.154/kWh for Hawaii, and $0.172/kWh for Maui.

New residential solar owners will also face a minimum monthly bill of $25.

The commission points out that these prices are roughly comparable to recently approved power purchase agreements (PPAs) for new utility-scale PV projects ranging from $0.111/kWh to $0.145/kWh. The grid-supply tariff is, therefore, “a reasonable approximation of the relative value of energy exported to the grid from such systems, and is appropriate for an interim transitional market structure.”

It is not, however, “a ‘market’ or threshold price” because the cost of renewable energy “is widely expected to continue to decline,” the decision notes. The new prices simply offer a starting place for further consideration during the next phase of the regulatory docket, because “the commission agrees with many of the [stakeholders] that further investigation of the costs and benefits of DER should be part of Phase 2.”

To provide some marketplace certainty, the decision orders the grid-supply tariff to be guaranteed for two years. To force right-sizing of rooftop installations, it orders the annual rollover of credits to be reduced to a monthly close-out.

The self-supply option proposed by the commission is a synthesis of proposals from many proceeding stakeholders. It is primarily aimed at creating solar owners who do not export their generation to the grid, though the commission stresses that no non-export designs should hinder the ability of solar systems to provide grid support when needed.

The self-supply tariff allows system owners to earn retail rate credit in the form of reduced bills for generation that aligns with their energy demand patterns. Utilities are required to manage the self-supply option along with the streamlining of interconnection standards ordered by regulators.

Finally, in what is likely the most important and least understood part of the decision, the commission also ordered the utilities to file a new time-of-use (TOU) rate proposal according to its guidance.

Reactions to the grid supply option

Solar sector boosters in Hawaii worry that the elimination of retail rate net metering will disrupt the building and interconnection process already underway for many rooftop solar projects. In particular, observers worry that installers reliant on third party ownership of rooftop systems will be hit especially hard.

“The solar companies that rely upon the third-party ownership model where systems are leased to customers may see a decrease in demand for their product,” said Hawaii Division of Consumer Advocacy Executive Director Jeffrey Ono.

The commission's new programs will allow DER owners “to take advantage of new energy storage technology and help insure safe, reliable service and fair treatment for all customers,” according to a statement from the Hawaii Electric Companies (HECO).

Utility Vice President Jim Albers acknowledged “the PUC’s thorough review of the complex issues,” but the company would not respond to requests for comment beyond supplying a statement.

The document offered no insight into challenges or opportunities the utilities might face implementing the new remuneration programs, but said they “are expected to be available to customers by Oct. 21.”

Environmentalists and solar sector players were not as welcoming of the decision.

Repealing NEM “takes Hawaii a step backward,” said Blue Planet Foundation Executive Director Jeff Mikulina. It was “by far the most successful renewable energy program in the state.”

“Without conducting a hearing or a study on the costs and benefits of solar, the Commission gave notoriously anti-solar HECO even more than it asked for,” said Robert Harris, attorney for Sunrun, a solar installer.

The decision undermines state leaders’ commitment to the 100% renewables by 2045 mandate and “is wildly out of step with Hawaii’s values,” Harris said. He predicted it would be reversed judicially or legislatively.

Some veteran state energy policymakers saw the PUC decision as a step in the right direction, however, and look forward to the next steps in the solar valuation process.

“Don’t waste Hawaii’s time and limited resources with an appeal,” wrote
former PUC Chair Mina Morita of a legal or political challenge. “The PUC did a thorough job in citing its legal authority, procedural history and finding of fact and conclusions of law in its Order based on the record.”

“It’s a good overall package of changes that needed to happen,” said Chris DeBone, Hawaii Energy Connection CEO and former president of the Hawaii Solar Energy Association. "Nobody likes change, but this is in the best interests of Hawaii.”

The technology advances driven by the new policies “will catalyze changes needed to get to 100% renewables,” DeBone added.

Based on today’s Oahu electricity rate, an installed cost of $4/watt, an average 5 hours of daily sun, and a system life of 25 years, retail credit NEM would provide a “windfall” rate of return of 18%. Coffman calculated. “That is enormous.”

With the new grid credit, Coffman said the rate of return is between 7.5% and 9%, depending on the utility.

“That is still quite high,” the professor said. “My 401(k) is not getting 7.5%. Nobody’s is.”

The grid supply credit “is a much closer approximation of the value of the resource than the NEM credit was,” she added. “It is getting much closer to being a more efficient incentive system.”

He does not believe rooftop solar in the state will be seriously hurt. When the Kaua’i Island Utility Cooperative NEM was fully subscribed in 2009, he noted, members continued to install rooftop solar PV under a comparably reduced credit.

Both Manglesdorf and DeBone independently agreed the new programs will not compromise the value proposition of a direct purchase of solar beyond viability.

With NEM, they each said separately, the payback period has been between four and five years. Under the decision’s terms, the payback will be between six and seven years and will still attract buyers.

“It is not an optimal outcome because people will be investing in infrastructure, solar and battery storage, that doesn’t really support the grid,” he added. But it is important.

“If the utility is not finding ways to integrate more solar into the grid, the self-supply option is there,” Wallsgrove said, “and the utility will see it as a threat of load defection – people leaving the grid for a portion of their demand.”

Manglesdorf believes it may be months before the technology is deployed to comply with new interconnection requirements imposed on the utilities by the decision. DeBone said his company, Hawaii Energy Connection, is ready to do it now.

It is clear that until Phase 2 of the regulatory docket is complete, “the PUC wants to encourage self-supply and make it as attractive as possible in relation to grid supply,” said Isaac Moriwake, an EarthJustice attorney representing the Hawaii Solar Energy Association (HSEA).

But, he said, the self-supply option encourages customers to "retreat behind their meter and maybe soon go off grid entirely.”

To the PUC's credit, it has taken a strong position on self-supply being a customer option the utility should not deny, Moriwake said. The option could possibly stand as a protection against any delays in interconnections imposed by utilities, but remains “suboptimal” from the standpoint of the grid, because it limits the services distributed generation can offer the rest of the system.

Time of use rates – the crucial piece

The decision specifies the time-of-use rate be an “opt-in” choice for customers and that the design include three time periods, “corresponding to the overall system peak period, a mid-day period, and an off-peak period.”

The mid-day period rate is to be set at a projected 2017 marginal cost of generation, while the peak period rate will be calculated by “combining fixed generation, transmission, and distribution costs” during peak hours.

The off-peak rate will be a marginal generation cost adjusted so that the overall price change is neutral for average residential customers that do not change their consumption behavior in response to the new rates.

Critics like Moriwake say the guidance lacks specificity. Without it, the TOU rate amounts to “just an add-on layer that affects the rate only for consumption, and not exported energy.”

If the TOU option doesn’t apply to net exported energy, it won’t affect the grid-supply rates, and “it’s only a half measure that no one will adopt,” he said.

TOU rates should a genuine third option for customers that rewards them for exporting energy at the right time, he said. And the rates should offer smarter price signals that drive the adoption of “the next generation of grid-interactive customer solar.”

A true TOU rate option would, Moriwake said, “knock out the ‘cost shift’ arguments because the solar owner is paying for grid costs when using grid electricity and supplying energy when the grid most needs it.”

He is hopeful the commission will provide “helpful clarification” that shows its TOU proposal is not just an extension of the rock bottom grid supply rates but a truly alternate customer option.

“This case is our golden opportunity to lead the way to the future of customer-based solar, but if the TOU option does not reward customers for installing next-generation, grid-interactive systems, we are missing the boat.”

Both Moriwake and Wallsgrove pointed out that the commission reprimanded HECO for its “apparent ambivalence toward establishing an effective TOU option for DER customers” during Phase 1 of the regulatory docket.

In this decision, Wallsgrove said, the utilities “ordered HECO to come up with something more robust and make it a legitimate opt-in option. But there are still a lot of questions.”

He believes the first and potentially the most important work of Phase 2 will be on the TOU rate design question. In that case, the commission’s guidance on how to structure the three pricing periods would act as a starting point.

“We know the minor existing TOU rates don’t change behaviors,” Wallsgrove said. “But there are differences among stakeholders about how effective and progressive and forward-looking the TOU rates will be.”

He foresees the utilities continuing to argue that TOU rates need to wait for Hawaii’s smart meter rollout to be complete, a position rejected by renewables and environmental advocates.

He also foresees a debate on pricing, because Hawaii currently does not have a big difference between peak and off-peak prices.

To do that, TOU rates must be both higher than current retail prices at the peak, and lower during off-peak hours, Wallsgrove said.

“Today’s spread of a few cents must be at least 10 cents or 15 cents,” he said. “The bigger the spread, the more the incentive for people to store their own power, to shift their own power use, to play a part in matching supply and demand.”

The Division of Consumer affairs’ Ono agreed “greater economic analysis” is needed on the TOU rates from the utilities.

“Whether or not consumers actually change their behavior will depend, in large part, on the rate differentials,” he said. “Some families may find it very difficult to shift their load to the daytime off peak hours.”

Much regulatory work remains, but with this decision the commission eliminated “some of the perverse outcomes associated with NEM and tied the value of the electricity more closely to its real value," Coffman said. “That is a pretty good compromise between expectations of certainty and knowing the system is changing so fast we can’t give certainty forever.”

“It’s time to move on to Phase 2,” Morita, the former PUC chair, wrote. “This investigation is about how to evolve and integrate Hawaii’s electric system with new services and products to serve all of Hawaii affordably and reliably with the most cost-effective and cleanest resources to be a model for the rest of the nation.”